Which of the following is a disadvantage of issuing equity?

Issuing equity can lead to a higher cost of capital compared to other financing methods like debt. This is primarily due to the fact that equity investors generally require a higher return on their investment to compensate for the risks they take on. Unlike debt holders, who are entitled to fixed interest payments, equity investors take on more risk, as they only receive returns if the company performs well and generates profit.

Additionally, equity financing dilutes existing ownership stakes as new shares are issued, which can further impact shareholder returns. Companies may also face pressures from equity investors to maintain high performance and growth, which can lead to short-term decision-making rather than long-term strategies.

In contrast, mandatory interest payments are a characteristic of debt financing, not equity, and equity retains ownership control for existing shareholders until new shares are issued. Tax advantages typically benefit debt financing as interest payments can often be deducted before tax, making equity a less favorable option if the goal is to maximize tax efficiency.